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CSKI Auditor Accused of Blessing Fuzzy Math
by Manuel Asensio - 3/9/2010 2:19:07 PM
* Editor's Note: This report has been republished with the permission of its author, Manuel Asensio, an accomplished investor with a track record for spotting possible fraud long before the market itself. Click here to read more of Asensio's research on CSKI and other companies.
A private investor has filed a lawsuit against the auditor of China Sky One Medical (NASDAQ: CSKI), alleging "fraudulent misconduct" and violation of securities laws for failing to correct CSKI's "materially false" financial statements.
The complaint states: "MSPC became aware of the fact that the CSKI financial statements were materially false and misleading and its unqualified opinion with respect to them was baseless. Despite becoming aware of these problems, and despite having a duty to correct the information that it knew to be false which had been disseminated into the market via the 10-K, MSPC failed to issue corrected statements or withdraw its support from the CSKI financial statements."
CSKI's auditor, Moore Stephens, has been the subject of a previous asensio.com report, which details the involvement of the firm in the First Jersey Securities scandal in the 1990's. The U.S. Securities and Exchange Commission censured the auditor and one of its current principals in 1999.
The complaint against Moore Stephens provides evidence of material inaccuracies in CSKI's audited financial statements, specifically concerning patent claims. CSKI's 2008 10-K filing claims that CSKI holds seven patents. The 10-K's audited financial statements assigned those patents a value of $15.09 million at the end of 2008. A year earlier, however, CSKI calculated the value of its patents at just $1.6 million instead. According to CSKI’s regulatory filings, those assets include such items as a “bag design patent,” a “box design patent” and an “Endothelin-1 patent relating to anti-tumor technology.”
An investigation by a Chinese law firm found only one valid patent registered for CSKI or any of its subsidiaries, however, according to a Feb. 10 legal report attached to the lawsuit. That patent covers a box design and belongs to Heilongjiang Tianlong Pharmaceutical (Tianlong), a company that CSKI acquired on April 3, 2008, according to CSKI's 10-K filing. The application date for Tianlong’s patent is April 2, 2008 – the day before CSKI closed its acquisition of Tianlong – with the actual grant date for that application coming in April of 2009.
The report does identify another patent application submitted by Harbin Tian Di Ren Medical Science and Technology, CSKI's main operating subsidiary. That application dates back to 2004, however, and has never been approved. “We expect this application is abandoned or is still pending,” the report explains.
Ultimately, the lawsuit reaches the following conclusion: “The CSKI financial statements were inaccurate in several material respects, including the fact that they reported that CSKI or its subsidiaries owned seven patents in China supposedly worth $15,093,718, when in fact it did not own any patents. As a result of this material misstatement, the assets of CSKI were substantially overstated in the 10-K."
According to the complaint, the plaintiff in the case sent a copy of the Chinese law firm's investigation report to Moore Stephens and asked the firm to revise its unqualified opinion in CSKI's 2008 10-K. However, the lawsuit states: "To date, MSPC has not responded to this request, either privately or publicly, nor has it taken any action to inform the public of its flawed opinion and of the fact that the CSKI financial statements are materially false and misleading."
* Asensio's firm supplied the following disclaimer: WE HAVE A POLICY AGAINST HAVING ANY DIRECT OR INDIRECT INTEREST AS AN ADVISOR, AGENT OR INVESTOR IN ANY SECURITIES THAT ARE THE SUBJECT OF ANY WWW.ASENSIO.COM REPORT FOR 30 TRADING DAYS BEFORE OR AFTER THEIR PUBLICATION.
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* Editor's Note: This report has been republished with the permission of its author, Manuel Asensio, an accomplished investor with a track record for spotting possible fraud long before the market itself. Click here to read more of Ansensio's research on CSKI and other companies.
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